PROPERTY EXEMPTIONS

Protecting property so each person can be a productive member of society
has been the foundation of exemption laws. The concept that certain property will
be immune from creditor attachment is not unique to American law, and in fact, has
deep roots. (205) The policy reasons are basic. Debtors cannot go to the workplace without clothes, nor can they perform their jobs without tools of their trades. (206)
Exemptions preserve citizens' ability and incentive to earn and pay taxes. Protecting
future wages ensures that individuals retain their incentives to continue working, to
work longer hours or under more adverse conditions, and to be productive, tax-paying members of society. Similarly, exemptions are intended to promote savings.
Laws exempt some retirement funds to encourage all citizens to make adequate
provisions rather than becoming public charges in their post-employment years.
Laws also shield disability payments so the government need not increase its grants
to provide a basic standard of living for its disabled citizens. Finally, property
exemptions protect items of nominal value that may not be necessary to earn a living,
but would do little to satisfy obligations to creditors. For example, used clothes or
household goods have little resale value for creditors that seized and sold them.
Additionally, wedding bands, family heirlooms and photographs may be highly
valued by their owners, but have no resale value at all. However, a creditor's threat
to seize this property can lead a family to liquidate other assets, borrow from other
people, or use any other means to find to protect these items from creditors. To curb
this leverage, exemptions often protect this personal property. (207)

Exemptions take on a heightened role in the bankruptcy system as the
bankruptcy laws reconcile the competing interests of creditors, something recognized
in the federal exemptions of the three short-lived statutes predating the Bankruptcy
Act of 1898 federal bankruptcy exemptions. The Bankruptcy Act of 1800 established
exemptions for necessary apparel, bedding, and a percentage of the estate keyed to
the amount of creditor distributions. (208) The Bankruptcy Act of 1841 offered a wider range of exemptions: it protected more clothing, household goods, and other
"necessaries" worth up to $300. The Bankruptcy Act of 1867 exempted even more
items within these categories of property, and also reflected contemporary events by
exempting military arms, uniforms, and equipment. Significantly, the 1867 Act
permitted debtors to avail themselves of the state law exemptions as well, so that
debtors could protect a wider range of property. Altogether, federal bankruptcy laws
were in force fewer than 20 years of the Nineteenth Century, and for the remainder,
state collection laws filled the gaps to protect essential property from creditor
process. (209)

Unlike its predecessors, the Bankruptcy Act of 1898 did not establish a set of
bankruptcy exemptions. It relied instead on state exemptions to protect debtors'
property. (210) Thus, the right to retain property in a federal bankruptcy proceeding depended on the exemption laws of each of the states. Critics charged that the law
failed to meet the Constitutional mandate for "uniform laws of bankruptcy."(211) In
Hanover National Bank v. Moyses, (212) the United States Supreme Court upheld the constitutionality of the 1898 Act and declared that the scheme yielded "geographical
uniformity" by ensuring that all citizens in a certain area received equal treatment
under the law. (213) Yet, geographical uniformity did not change the fact that creditors of financially identical debtors would receive very different distributions in
bankruptcy depending on where those debtors happened to live.

As the Bankruptcy Act weathered the evolution of debtor-creditor relations
throughout the Twentieth Century, the goals of the consumer bankruptcy system
matured and diverged more sharply from those of state law creditor collection
statutes. Although exemptions should not be unnecessarily generous, grossly
insufficient state exemptions were inconsistent with rehabilitating failing families
and encouraging work and self-sufficiency. The problems of relying on state laws
were compounded by the fact that many state exemption laws had become so
outdated in the types of property they exempted that they were laughable in a modern
economy.

Mindful of these concerns, in its 1973 Report, the Commission on the
Bankruptcy Laws of the United States proposed that Congress enact a set of uniform
federal exemptions. (214) To that end, the 1970 Commission provided a draft statute with exemptions that conceivably would be appropriate for bankruptcy purposes
when the claims of creditors were being discharged. The bankruptcy system would
no longer have to rely on the excessively generous exemptions of some states or the
exceedingly miserly exemptions of others. The 1970 Commission also aimed to
reduce wasteful litigation over whether certain pieces of property fit the state
exemptions, which dissipated any available assets on lawyers' fees and court costs that might
otherwise be distributed to the creditors.

Taking a slightly different approach, the National Conference of Bankruptcy
Judges ("NCBJ") recommended that Congress enact a slate of federal bankruptcy
exemptions but proposed that all debtors be permitted to choose between federal and
their state exemptions. (215) The NCBJ Proposal would have guaranteed a base
exemption for all debtors - the proposed federal exemptions - while it would have
permitted debtors to claim larger exemptions if they lived in states with more
generous exemptions.

Congress considered these proposals during the debates over what became
the 1978 Code. The House endorsed the NCBJ exemption approach. The Senate,
however, advocated the retention of exclusive use of state exemptions, incorporating
both the high and the low state exemption levels into the federal system. Late in the
process, Congress adopted a provision that offered a slate of federal exemptions but
also allowed states to "opt out." Through the opt out mechanism, a state could
preclude its own residents from using federal exemptions when they filed for
bankruptcy. (216) If a state did not opt out, those residents could elect either the state or the federal exemptions, as the House and NCBJ approach proposed. Two thirds of
the states opted out of the federal system, permitting their citizens access only to state
exemptions, while the residents of the remaining states had access both to federal and
state exemptions. Subsequent amendments to section 522 have clarified some issues
and adjusted the dollar amounts of the federal exemptions, (217) but the fundamental structure of the exemptions system has not changed since enactment of the Code.

Although little public debate centered on this part of the new Code when
initially enacted, the exemption provisions subsequently have provoked much
commentary and have yielded a large body of conflicting case law. Litigants have
attacked the provision as lacking Constitutionally mandated uniformity, as providing
an impermissibly broad power delegation to state legislatures, and as a violation of
the Supremacy Clause, but the opt-out clause has survived such challenges. (218)

1.2.1 Elimination of Opt Out

A consumer debtor who has filed a petition for relief under the
Bankruptcy Code should be allowed to exempt property as provided in
section 522 of the Code. Subsection (b)(1) and (2) of section 522 should
be repealed.

Exemption policy is a fundamental component of consumer bankruptcy. (219)
Exemptions, along with the discharge, are so central to bankruptcy that they cannot
be waived in advance of a bankruptcy filing. (220) However, current exemption policy is channeled away from bankruptcy policy-makers toward a variety of state
legislatures. (221) The result of the opt-out is a complex exemption system in which variation is the norm. In the states that have opted out, the federal exemptions in
section 522(d) are completely abrogated, leaving state legislatures to determine how
much property debtors can keep when they file for federal bankruptcy protection and
discharge their debts. (222) In "debtor's choice" states that have not opted out, debtors can choose the set of exemptions that best insulates the greatest amount of property
from the reach of their creditors. Yet, bankruptcy law purports to control the
claiming, safeguarding, and sometimes entitlement to exemptions; this partial
delegation produces confusion when state and federal law are seemingly
irreconcilable. (223)

It arguably would be reasonable to use state law exemptions if they reflected
regional variations in cost of living or property use, but they do not. A comparison
of state homestead exemptions and the relative cost of living reveals that state
homestead exemptions do not reflect a relative cost of living assessment. For
example, in 1991, Rhode Island had the fifth highest median home value in the
country and yet had a homestead exemption of zero; conversely, Iowa had the third
lowest home value in the nation and had an unlimited homestead exemption. (224) No
regional cost variation explains why California has very generous exemption laws
while New York does not. The lack of rationale extends to personal property as well.
For example, compare three states in which a reasonable car might be equally
necessary to commute to work: Kansas permits its citizens to exempt up to $20,000
in a vehicle while Missouri exempts only $1,000, and, until recently, Nebraska had
no automobile exemption at all. Nebraska debtors now may exempt $2,000 in a
motor vehicle, but only if the car is used as a tool of the trade, or to commute to and
from work. (225)

Although different intrastate values and historical artifact may be perfectly
appropriate factors to determine exemptions in the context of state collection laws,
they create difficulties when integrated with a national statute that contains a delicate
balance between all parties in a collective proceeding. Debtors with roughly
equivalent economic profiles and similar property are receiving vastly dissimilar
treatment through the federal bankruptcy system, and correspondingly their creditors
do as well. A debtor who cannot save a car, a home, and household furniture under
one state's exemption laws may look across the state line to see a similar debtor
saving all of those items and more. (226) In addition, although there has been significant revision in state exemption statutes since 1978, state exemption laws are
sometimes a collection of archaic remains. (227) Moreover, some states require a debtor to file a deed of exemption in advance of a bankruptcy filing in order to exempt
certain property, a requirement that can become a trap for the poorly informed
debtor. (228)

In deferring to state law exemptions, the current system also multiplies the
opportunities for forum shopping and prebankruptcy asset conversion. It does not,
however, establish whether state or federal laws should control questions concerning
the propriety of prebankruptcy planning, yielding tremendous litigation for debtors
and creditors. (229) According to most commentators, Congress intended that the system permit debtors to maximize the use of exemptions, (230) but the case law has not yielded coherent rules on what constitutes appropriate pre-bankruptcy planning. This
sometimes leads to decisions holding that debtors have overreached in their efforts
to maximize the value of their exemptions. (231) As a consequence, some debtors unwittingly risk losing their entitlement to exemptions, seeing transactions unwound,
or losing their discharges altogether, while others engage in similar behavior and
successfully protect substantial sums of property. (232)

The opportunities for prebankruptcy planning created by the exemption opt-out have called the integrity of the bankruptcy system into question, particularly in
the context of a small handful of high-visibility debtors. People with no other
familiarity with the bankruptcy system can cite celebrities who have shielded
millions of dollars in an expensive homestead in certain states, a behavior that
erroneously is attributed to federal law, even though the federal exemptions would
not have allowed this shielding to occur. (233) Unlimited homesteads have led to national ridicule and the efforts of some less needy and better represented families
to find literal and figurative shelter in generous states. (234)

The bankruptcy system was designed to deal with the consequences of
financial failure and to reorganize the honest but unfortunate debtor, a fundamental
tenet that should be reflected in a national bankruptcy policy. Until the bankruptcy
system sets its own carefully balanced exemption policy, the integrity of the system
remains at risk, with serious repercussions for all debtors and creditors.

The Commission recommends the elimination of the provision in section 522
that permits states to opt out of bankruptcy exemptions. State exemption law would
be fully applicable to individuals who deal with their creditors under state law and
for the creditors who pursue their rights through state law. Yet, for debtors who seek
the protection and unique attributes of federal law, such as the automatic stay and the
discharge, the implicit bargain is different. To receive federal protection, a debtor
should be willing to give up all property in excess of a federally-determined amount.
At the same time, each debtor who declares bankruptcy would be guaranteed protection
of the same amount of property, and creditors will be entitled to the excess,
regardless of where the debtor resides. Beginning with a premise of national
uniformity, the exemption rules can be crafted in light of the particular policies and
special features of bankruptcy law and collective bankruptcy proceedings.

1.2.2 Homestead Property

The debtor should be able to exempt the debtor's aggregate interest as
a fee owner, a joint tenant, or a tenant by the entirety, in real property
or personal property that the debtor or a dependent of the debtor uses
as a residence in the amount determined by the laws of the state in which
the debtor resides, but not less than $20,000 and not more than $100,000.
Subsection (m) of section 522 should be revised to reflect that all
exemptions except for the homestead exemption shall apply separately
to each debtor in a joint case.

Throughout the Twentieth Century, governmental entities have created
incentives and supported various programs to help families become homeowners.
For most Americans, a home not only provides physical family shelter but it is also
the most significant and valuable financial asset they will own. (235) American families hold a substantial proportion of their net worth in their homes. A homeowner is
likely to remain a homeowner through retirement; the vast majority of Americans
over the age of fifty live in their own homes. (236)

For many Americans, home equity is a form of long-term savings and an
informal retirement plan. To the extent that families make this long-term investment
to provide for future needs rather than spending their incomes on consumable goods,
governmental policy generally favors that choice.

Nonetheless, home ownership, in itself, is neither an insurance policy against
financial distress nor a badge of solvency. Homeowners tend to be more financially
secure than renters, but they are not immune from economic troubles or the need for
bankruptcy. Rather, homeowners represent almost one half of bankruptcy filers. (237)
The great majority of homes owned by debtors in bankruptcy are encumbered by at
least one mortgage, and often two or three mortgages or liens are attached to the
property.

States traditionally have held a particularly strong interest in the homestead
rights. Some states, such as Florida, Texas, and Oklahoma, provide homestead
protection in their state constitutions. Some states find homesteads to be so
important that they will protect homesteads of any value, even those worth more than
a million dollars. Yet, other states recognize no homestead at all, including
Maryland, New Jersey, Pennsylvania and Rhode Island. Others have only nominal
homestead exemptions, and the remainder fall somewhere in between. (238)

To promote debtor rehabilitation and to advance other governmental policies,
there is adequate cause to establish preemptive bankruptcy homestead exemption
policies. However, the Commission recommends providing limited incorporation of
states' longstanding interest in setting the parameters of homestead protection.
Providing debtors with no homestead exemption at all is flatly inconsistent with the
fresh start goal of the bankruptcy system, the numerous federal policies promoting
home ownership (e.g., federally insured mortgages, tax deductibility of interest on
home mortgages), and the prevalent and widely-accepted use of the home as a long-term savings plan. At the same time, permitting unlimited homestead exemptions
plainly violates bankruptcy's goal to liquidate and ratably distribute assets among the
creditors when a debtor seeks a discharge from outstanding debts.

To reconcile state law interest in the homestead with bankruptcy policy
considerations, the Commission's Proposal recommends that state law
determine the amount of the homestead exemption within a permissible range and determine the character of property to which a homestead exemption would
attach (e.g., a mobile home). However, the federal floor would apply regardless of
whether the debtor filed a deed of exemption in advance, required by some states,
which can be a trap for the unwary. (239) The floor-and-ceiling approach is a compromise that preserves some of the state variation while it narrows the range of
differences to eliminate the most serious concerns about unprotected and
overprotected homeowners.

Setting the Floor. A variety of factors are relevant in determining the
appropriate floor, such as the number of states with exemptions at that level, a
comparison of the proposed floor with the current federal exemption, and policy
reasons for protecting the homestead. A homestead exemption protects only the
debtor's equity in a home. Notwithstanding the fact that home values might be quite
high, most debtors have encumbered their homes with large mortgages, so that the
amount of equity needed to exempt and keep the home is quite modest. (240) Most homeowners in bankruptcy will not have equity that meets or exceeds the $20,000
floor that the Commission is recommending. On the other hand, setting the floor any
lower would discriminate against elderly homeowners and frustrate their savings
efforts, because they are more likely to have built up a greater portion of equity than
their younger counterparts who have greater earning potential ahead. (241) The floor must reflect the fact that the homestead is both a physical shelter and a long-term
savings device. In addition, in states that have low homestead exemptions, some
debtors with equity that slightly exceeds the exemption may be encouraged by
Chapter 7 trustees or other parties to further encumber the property with mortgages
to prevent liquidation. This practice benefits neither the debtor, who emerges from
bankruptcy with greater encumbrance, nor the debtor's prepetition unsecured
creditors, who still get nothing. Thus, it is sensible to set the floor sufficiently high
to curb this practice.

Some states vary their exemptions by marital status, number of occupants or
dependents, age of debtors, and location of homestead. To simplify the comparison
of the proposed floors with the presently applicable exemptions, this discussion will
presume that the debtors are jointly-filing spouses under 60 years of age with two
dependent children and reside in a non-rural area.

The first draft of the Commission's Proposal recommended a $40,000
floor. (242) Approximately nineteen states have exemptions of $40,000 or more for a family of four, and it would increase the exemption for the remainder. This floor
would provide $10,000 more in potential homestead protection for joint filers and
$25,000 more for single filers than the current federal exemption. Some people
suggested that exempting $40,000 of equity is an insufficient floor for rural areas and
high cost of living areas, (243) while others thought that it was unnecessarily generous and too drastic a change from the homestead exemptions used currently in many
states. (244) With respect to $30,000, for the aforementioned family of four, twenty-five states have homestead exemptions at or above this number. This floor also comports
with the federal homestead exemption currently available for joint filers. In addition,
five states and the District of Columbia have very low state homestead exemptions
and have not opted out of the federal exemptions. Thus, assuming that homeowner
debtors in these states generally choose the federal exemptions, this functionally
brings the number of states with bankruptcy homestead exemptions at or above
$30,000 to thirty-one.

Thirty-two states, including states that permit their citizens to use the federal
exemptions, have homestead exemptions at or above $20,000 for joint debtors with
two dependents in a non-rural region. A federal floor of $20,000 effectively would
reduce the available bankruptcy homestead exemption for debtors in five states and the
District of Columbia that provide little or no homestead exemption but presently
permit the family of four to use the $30,000 federal homestead exemption. Thus,
joint filers would get less protection than they currently receive under the federal
exemptions. In addition, a number of states provide homestead exemptions of
$10,000 or $15,000; in those states, establishing a $20,000 floor would constitute a
less radical change to current law but would be consistent with the policy
considerations behind this Proposal.

The Commission ultimately adopted the $20,000 floor as being the least
drastic change while ensuring that families forced to avail themselves of bankruptcy
protection can retain a reasonable amount of equity in their homes. It would narrow
the wide gap in treatment of economically similar debtors in states with disparate
views of the homestead and would bring their treatment into accordance with the
bankruptcy system's view of the role of the homestead in the reorganization of a
debtor. The exemption floor reflects the use of the home as a savings and retirement
plan and should make bankruptcy policy consistent with other federal policies
promoting home ownership.

Because imposing a federal floor would raise the homestead exemption in
some states, some have expressed concern that this change might encourage more
families to file for bankruptcy or to file for Chapter 7 rather than Chapter 13. (245)
Empirical evidence refutes this assertion. Economists, statisticians, and legal
scholars repeatedly have found that larger property exemptions or debtor-favoring
bankruptcy laws have not caused increases in bankruptcy filings, nor is there
persuasive evidence showing that exemptions affect debtors' choices between
Chapter 7 and Chapter 13. (246) Corroborating the majority of private studies, an Administrative Office of the U.S. Courts Working Paper has indicated that states
with generous exemptions often have higher proportions of Chapter 13 filings than
states with more meager exemptions. (247) Conversely, states with very low exemptions do not necessarily have Chapter 13 filing rates above the national average. (248) In
addition, the proportion of Chapter 13 cases filed varies tremendously within some
states with multiple districts, which suggests that differences in state-wide exemption
laws do not explain the chapter choice. (249)

Setting the Ceiling. Quite a few states allow debtors to exempt over $100,000
in home equity or impose no monetary cap on the homestead. (250) The recommended $100,000 ceiling would restrict the homestead exemption in some states, freeing
more property for creditors in cases involving high-asset consumer debtors.
Individuals with ample means still might use homesteads to judgment-proof
themselves outside of bankruptcy, but they would forfeit this ability once they sought
the benefits of federal bankruptcy relief.

Although some have argued that a $100,000 cap on homestead exemptions
is too high, the cap is consistent with legislation introduced in the U.S. Senate during
the 104th and 105th Congress and is lower than the proposed cap of $500,000 in
Senate Bill 1559 that passed in the Senate and was referred to the House Committee
on the Judiciary in 1996. (251)

To be clear, setting a cap at $100,000 does not mean that debtors in all states
can keep this much equity. The Commission's Proposal to impose a $100,000 cap
would be an issue in only the few states that have homestead exemptions higher than
$100,000 or unlimited in amount. Capping exemptions has no effect on the majority
of state homestead exemptions that are lower than $100,000.

Homestead Exemption Based on Households. In some states, a standard
homestead exemption applies equally to debtors whether single or married. Other
states provide a per-person exemption or offer enhanced exemptions for people who
are married. The present set of federal exemptions provides each individual debtor
a homestead exemption of $15,000, but gives $30,000 to a married couple filing
jointly.

The Commission proposes that the floor and ceiling should apply equally to
all households, regardless of whether a debtor files singly or jointly. The need for a
homestead may be based more on the formation of a household than on whether one
or two adults live in the home. Single parents or widows or widowers may need a
homestead exemption that is as large as if they lived with spouses. (252) The property exemption would apply to the interest of either the single debtor or the married
couple without distinction. The Proposal would not change the states' ability to
enhance the amount of an exemption based on family size within the federal floor
and ceiling. However, debtors could not "stack" exemptions beyond the otherwise
available amount by filing separately. For example, if a husband and wife filed
separately in a state with a $20,000 homestead exemption, each could claim a
$20,000 exemption in the homestead, but the calculation of the exemption, coming
immediately after applicable mortgages, would protect the same $20,000 in value in
the home. Neither bankruptcy defers to or accounts for the other bankruptcy, and
thus the exemption should be the same as if the couple filed jointly.

The Commission's floor and ceiling Proposal also would apply regardless
of the form in which debtors hold the property, and thus would apply to property held
in tenancy by the entirety. When spouses hold property in a tenancy by the entirety,
as is permitted in about half of the states, spouses have joint ownership of an
undivided interest in property. In most states, this means that property held in
tenancy by the entirety cannot be transferred or encumbered by one spouse
individually. However, tenancies by the entireties are not completely sheltered from
the bankruptcy process even if only one spouse files for bankruptcy. (253) As an initial matter, it now is generally accepted that a singly-filing debtor's interest in tenancy
by the entirety property is part of the debtor's bankruptcy estate under section
541(a). (254) The property is not automatically subject to administration because of the protection offered by some state law exemptions, (255) but most state laws do not protect entireties property from levy by joint creditors. (256) Thus, the presence of joint
creditors in the bankruptcy case may permit the trustee to administer the property. (257) Because the Commission declined to provide greater bankruptcy exemptions to
married people than to unmarried people, the proposed homestead exemption would
not distinguish between property held by the entirety, joint tenancy, or other forms.
If a married person opts for bankruptcy protection and owns property in tenancy by
the entirety, that debtor would be treated as a joint tenant under the Commission's
Proposal. The property would be part of the bankruptcy estate, half of the equity
would be reserved for the nondebtor spouse in the event of liquidation, and the debtor
would be entitled to the homestead exemption provided by state law, within the
federal floor and ceiling. The trustee would administer assets equally for joint and
non-joint creditors. Similarly, in the few states that permit property other than real
property to be held in tenancy by the entirety, (258) the proposed federal exemptions could be applied to the debtor's portion of the property.

Application of Indexing. Due to the ravages of inflation, any exemption
limits can become outdated if not reviewed periodically. Based on the Consumer
Price Index, there was 115% inflation between 1978 and 1994, but no adjustment of
exemptions. To deal with this imbalance, Congress added section 104 to provide for
adjustment of dollar amounts throughout the Bankruptcy Code. (259) Beginning in April, 1998, and every three years thereafter, the dollar amounts reflected in the
exemption provisions as well as other bankruptcy provisions, will be readjusted to
reflect the change in the Consumer Price Index since the last adjustment. This
provision would remain applicable to the floor and ceiling on the homestead
exemption, as well as the nonhomestead exemption that is discussed below.

1.2.3 Nonhomestead Lump Sum Exemption

With respect to property of the estate not otherwise exempt by other
provisions, a debtor should be permitted to retain up to $20,000 in value
in any form. A debtor who claims no homestead exemption should be
permitted to exempt an additional $15,000 of property in any form.

The amount of nonhomestead property that can be retained through a federal
bankruptcy process falls squarely within Congressional province and is equally
relevant to all debtors who come through the bankruptcy system, regardless of where
they live. Debtors' economic profiles are strikingly similar throughout the country. (260) This justifies roughly equal entitlement to exemptions. However, people hold their
assets in different forms. To this end, the Commission's Proposal provides a lump
sum property exemption that can be used for many different kinds of necessary items.

As a practical matter, parity in outcomes cannot be accomplished without
considering the actual variety among debtors and creditors with similar economic
profiles. Specific property needs may be vastly different, both inter- and intra-region.
Because state exemption laws generally do not take into account
the vast intrastate variations in the cost of living, they may not, in fact, address local
needs at all. (261) Housing costs in upstate New York and Manhattan, for example, differ greatly, but they are equally subject to a single state exemption. The
Commission heard repeated testimony about the differences in local conditions that
should not be coaxed into a uniform mold by a rigid federal statute, (262) and agrees with that assessment. No legislature-federal or state-can know exactly what types
of property optimally facilitate the rehabilitation of any given family. The variety in
cultures, trades, and climate yields diversity that makes it inappropriate to
predetermine overly-specific categories of property.

Recognition of this tremendous nationwide diversity can be accomplished
through a single system with sufficient internal flexibility to accommodate regional,
local, and idiosyncratic needs. Debtors are in a superior position to know what items
are most essential to their own fresh starts. (263) Narrow and inflexible categories prevent the kind of efficiency that the debtors' own decision-making adds to the
process. The bankruptcy system and its users are best served by setting a level of
property exemption that is fair and reasonable to both debtors and creditors in light
of the goals of the bankruptcy system, without delineating property item by item.

The lump sum approach also is superior in its actual implementation because
it will reduce disputes over whether property qualifies for a certain exemption. (264)
Limiting the regional disparities would minimize forum shopping and pre-exemption
planning, by which the carefully-advised debtor preserves large amounts of property
while his poorly-advised counterpart loses similar property. Time consuming
questions relating to proceeds of otherwise-exempt property will be eliminated. (265)
By taking these issues off the table, the lump sum exemption would provide equitable
results for all debtors and their creditors.

The lump sum property exemption also prevents further tears in the social
fabric because it discourages the practice of challenging exemptions of small
household items of little economic value, but tremendous idiosyncratic value. This
type of activity, which has no place in a collective bankruptcy proceeding, ceases
under this Proposal. If an item has nominal liquidation value, and is exempted in the
allowable cash value lump sum exemption, the inquiry ends.

The lump sum exemption also permits families some flexibility in protecting
their homes. A family may be able to use part of the lump sum exemption to exempt
equity that exceeds the state-provided homestead exemption. For example, if a
family had $23,000 of equity in a home when the state exemption protected $20,000,
the family might be able to protect the extra $3,000 of equity under the lump sum
exemption.

The current federal exemptions have both dollar-limited exemptions and
some unlimited exemptions for certain kinds of property, such as home health aids.
The $20,000 lump sum exemption in the Commission Proposal is less than the
dollar-limited exemption in the current federal law. (266) The petition date is the relevant date for property valuation.

Many parties believe that a $20,000 lump sum exemption is substantially
larger than many state exemptions. (267) It is true that many states do not have large "wildcard" exemptions under which one can keep property in any form. Yet, some
categories of property that one can keep under state law are not limited in value and
thus could far surpass $20,000. For example, a state with exemptions considered to
be modest overall permits debtors to keep one horse, even if that horse is a race horse
worth over $600,000. (268) Therefore, by capping the lump sum exemption at $20,000, the Commission's Proposal eliminates exemptions that might enable a savvy debtor
to shelter abundant property while obtaining the benefits of bankruptcy.

Homestead Equalization Exemption. Not all debtors own their own
residences and therefore will obtain no protection from the homestead exemption.
Likewise, many debtors live in homes that they technically own but have no equity
in them. For this reason, current federal exemption law contains a homestead
equalization exemption. (269) The Commission recommends a $15,000 homestead
equalization exemption to reduce discrimination. It also would provide some balance
for the one quarter of homeowner debtors who have no equity in their homes at all. (270)
Because some nonhomeowners use other means for long-term savings, this
equalization provision permits them to reserve necessary value free from creditor
attachment. Without a homestead equalization exemption, economic discrepancies
among homeowners and nonhomeowners would be exacerbated. The effort to
rehabilitate all debtors, not just homeowners, would be undercut.

Establishing the appropriate homestead equalization amount depends on a
number of factors. Saving a home is not at issue, which eliminates larger social
implications of forcing a family to move and the variations in valuation. Originally,
the Commission considered a homestead equalization bonus of half the amount of
the unused homestead exemption, but this calculation would invoke needless
confusion in conjunction with the floor and ceiling approach to homestead
exemptions. In addition, the bonus would have protected a disproportionately high
amount of personal property for debtors whose state laws otherwise would have
entitled them to a $100,000 homestead exemption. There is little justification for
variation of this exemption among debtors in different jurisdictions, making a
uniform equalization amount appropriate.

Impact of Homestead and Lump Sum Exemptions on Number of No Asset
Cases and on Chapter 7 Trustee Practices. Some parties have suggested that the
Commission's recommended lump sum exemption and floor on homestead
exemption will have a significant effect on distributions to creditors. (271) The implication is that the exemptions are set higher than current exemptions in many
states and therefore more cases will be deemed "no asset" cases because they will
have no nonexempt property and creditors will get fewer distributions in Chapter 7.
Although reliable data are hard to gather, the Commission attempted to obtain some
information on the financial impact of providing a lump sum personal property
exemption and floors on homestead exemptions in states that currently have lower
exemptions or no exemptions.

The analysis of the impact of creating a federal floor on exemptions begins
with the uncontested point that most consumer cases yield nothing from the
liquidation of assets. According to a General Accounting Office study of 1.2 million
petitions that were closed as of June of 1992, approximately 5% of the total Chapter
7 cases nationwide were denominated as "asset" cases. Therefore, under the current
exemptions, 95% of all Chapter 7 cases yield nothing for unsecured creditors. Of this
5% of the Chapter 7 cases that are denominated asset cases, however, it is the
business cases, not consumer cases, that generated most of the revenue. Nearly 80%
of all creditor receipts in Chapter 7 were produced in business cases. (272) Businesses in corporate or partnership form have no property exemptions at all, and therefore the
Commission's recommended exemptions would not affect the returns from those
cases. Thus, these data suggest that the Proposal would have no effect on nearly 80%
of the creditor distributions now received.

Overall, the change to federal exemptions potentially could increase creditor
returns. Within the 95% "no asset" cases under the current system are some cases
that may be asset cases under the Commission's Proposal. The present system is
based on various state statutory schemes that exempt certain types of property
without regard to value. An individual who has an asset of substantial value that fits
into a state exemption that has no specific dollar cap would have a no-asset case
under the present system, but would have an asset case under the Commission's
proposed lump sum exemption system. For example, a number of states provide full
exemptions for many types of insurance plans and other investments without a dollar
limit; these would not be exempt under the Commission's Proposal beyond the lump
sum exemption. To the extent that the cases currently listed as "no asset" include
those in which debtors have been able to avail themselves of unlimited exemption
categories, the number of no asset cases could decline under the Commission's
Recommendation.

Other factors somewhat unrelated to the dollar amount of exemptions may
play a large role in determining how much property debtors can keep, but changes in
these practices may not always translate into increased returns to creditors. Some
judges and practitioners have noted that some Chapter 7 trustees do not find it cost
effective to search for assets or to liquidate assets in relatively small cases. Because
of the high cost of administration, liquidating the nominal assets in consumer cases
does not translate into higher distributions to creditors in the aggregate. When
trustees liquidate small consumer estates, more money often goes for their fees and
expenses than for distribution to the creditors. For example, the General Accounting
Office found that in estates with assets of less than $50,000, only 22% of the assets
were actually distributed to general unsecured creditors, while over 28% went to fees
and expenses. (273)

Propensity to liquidate low asset estates can vary widely even within a state,
indicating that the exemption levels themselves do not dictate these practices.
According to a U.S. trustee in Georgia, a relatively low exemption state, Chapter 7
trustees in one city in his region pursue hundreds of cases with less than $5,000 in
assets even if cost of administration would consume the majority of those assets,
while trustees in other cities in his region do not pursue such cases on the theory that
doing so yields nothing for the creditors. The costs of trustee supervision borne by
the U.S. trustee offices can be significant even when little or no distribution is made
to the creditors.

With a lump sum exemption, fewer of these cases at the margins may be
candidates for liquidation, but it is far from clear that this will have any appreciable
effect on returns to unsecured creditors. On the flip side, estates with more
significant assets are likely to be more accessible for liquidation than under many of
the present state law property-specific exemptions. Trustees might liquidate fewer
estates but yield higher returns for creditors overall.

1.2.4 All professionally-prescribed medical devices and health aids necessary
for the health and maintenance of the debtor or a dependent of the
debtor should be exempt.

The Proposal would carve out only one specific personal property exemption:
professionally prescribed health aids for a debtor or dependent would be exempt
independently and without limitation. Items falling into this category can be
exceedingly expensive. A family's need for professionally prescribed health aids is
in addition to, and not in place of, other types of property. It would be antithetical
to the rehabilitative goals of bankruptcy, and generally contrary to public policy, to
require a debtor to choose between retaining household goods, tools of the trade, and
a wheelchair for a disabled child. Similarly, a prescribed health aid should not
become an object of leverage for general creditors.

1.2.5 Rights to Receive Benefits and Payments

All funds held directly or indirectly in a trust that is exempt from federal
income tax pursuant to sections 408 or 501(a) of the Internal Revenue
Code should be exempt.

Few would refute the sound reasons for protecting of pension and retirement
plans from the reach of creditors. Although families invest significantly less money
in retirement funds than they put into homes, (274) public policy demands that people not be discouraged from saving for their later non-income producing years when they
otherwise might become a drain on the public fisc. (275) According to the Federal Reserve, families in all economic sectors report increased retirement savings. (276)
Retirement funds are the largest single type of financial asset held by American
families, constituting over 25% of financial assets held by families in 1995, and the
percentage of families in almost every demographic group holding retirement
accounts grew between 1992 and 1995. (277)

Far from signifying excessive wealth, retirement funds have become a
middle class necessity, especially in light of the diminishing adequacy of social
security funds and other deferred benefits. Similar to the considerations regarding
the homestead, bankruptcy should not discourage what other federal policies and
common sense encourage.

Yet, protection of retirement fund contributions should not be boundless.
Retirement funds should not become a vehicle for clever debtors to hide money
temporarily in contemplation of bankruptcy. Currently, various state federal laws use
different means in attempts to control debtors' retirement fund exemptions. Current
federal exemptions rely on subjective judicial determinations of what would be
"reasonably necessary" for that debtor to support herself and dependents, similar to
some state law exemptions. (278) This fact-based test can lead to excessive litigation or intrusive and time-consuming inquiries. (279) States have employed a variety of other methods to determine the extent to which retirement funds should be exempt. Some
state laws effectively exclude certain types of plans from the bankruptcy estate if they
qualify as spendthrift trusts or are federal tax-protected, while other states exempt
pension fund contributions in only limited circumstances, such as for public
employees. (280) Some states employ look-back periods and apply special rules for eve-of-bankruptcy contributions, (281) while others impose specific monetary caps. (282)

The Commission does not contemplate making any significant policy shifts
in this area but attempts to provide a uniform and fair rule so that debtors do not
receive different levels of protection of their retirement plans depending on who their
employers are or where they live. A uniform approach to retirement funds, with as
little change to upset nonexcessive past retirement planning, seems appropriate.

Retirement plans that are ERISA-qualified or meet the legal requirements for
spendthrift trusts already are protected under current laws in all jurisdictions and are
not included as property of the bankruptcy estate. (283) The Commission recommends that the exclusive federal bankruptcy exemptions for other pension plans rely on the
federal tax restrictions, exempting retirement funds in bankruptcy to the extent they are exempt
under federal tax laws. By exempting all funds held indirectly or directly in a trust
that are exempt under sections 408 or 501(a) of the Internal Revenue Code, the
debtor would be able to protect self-employed KEOGH plans and individual defined
benefit plans, as well as other plans that have federal tax protection. This permits the
bankruptcy laws to employ the developed supervision of the Internal Revenue Code
to evaluate what kinds of plans and what kinds of contributions are encouraged as a
matter of public policy.

Three types of pension plans-defined benefit plans, defined contribution
plans, and individual retirement accounts-are given special protection in the Internal
Revenue Code. Defined benefit plans follow formulas that regulate qualifying
contributions. Termination of such plans is very difficult, with penalties exceeding
50% of the amount deposited. Defined contribution plans are limited to 25% of
compensation or $30,000, (284) whichever is less. For a family earning the median family income listed in bankruptcy of about $22,000, the maximum deduction would
be $5,500, if the family members made such a contribution. Contributions to IRAs
are limited to $2,000 per year per taxpayer.

Because the tax provisions limit the amount of contributions in a single year,
a debtor would not be able to make an extraordinary contribution to shield assets
temporarily from creditors. To the extent a contribution exceeded the allowable
contribution and thus would be subject to penalty under the tax laws, the contribution
would not be exempt for bankruptcy purposes. The integrity of the system would be
best served by this limitation that precludes exemption of excessive and improper
contributions and prevents the shielding of extraordinary sums through the use of
various types of insurance plans, which some state laws currently permit.

1.2.6 Rights to Payments

Rights to receive future payments (e.g., social security benefits, life
insurance) should be exempt, and the debtor's right to receive an award
under a crime victim's reparations law or payment for a personal bodily
injury claim of the debtor or the debtor's dependents should be exempt.

Certain future rights to payment generally have been beyond the reach of
liquidation in a Chapter 7 proceeding. The Commission endorses the continuation
of those policies. Future wages would not be property of the estate in a Chapter 7
case. (285) Debtors would continue to be able to exempt unmatured life insurance contracts, (286) although cash value would have to be exempted under the $20,000 lump sum exemption. The debtor also would retain the right to receive undistributed and
unaccumulated social security, unemployment compensation, public assistance,
veterans' benefits, and disability, illness or unemployment benefits. (287)

In addition, the Commission recommends that debtors be able to
exempt any rights they might have to receive a crime victim's reparation award or a
personal injury award. (288) Although the current federal exemptions provision caps personal injury award entitlements at $15,000, many states do not impose such a
limitation. There is little evidence that this type of exemption is a likely or frequent
subject of scrutiny or abuse and there is little justification for the cap.

Competing Considerations.

This Proposal stops short of providing a uniform homestead exemption and
thus it does not resolve all of the difficulties in applying state property laws to a
federal bankruptcy proceeding. (289)

Some remain convinced that each state legislature is better suited to
determine the appropriate level of exemptions for their citizens in the context of the
federal bankruptcy system and that this Proposal does not take regional differences
sufficiently into account. For many of the reasons already discussed, this Proposal
does not adopt that view. Exemptions in bankruptcy involve somewhat different
considerations than exemptions in state law collection actions, demanding a greater
need for uniformity and more considered choices that focus on the discharge and
fresh start. These reasons justify more centralized policy choices. State law
exemptions cannot be said, as a whole, to be based on the cost of living relative to
other states. State law exemptions also do not address the very significant intrastate
distinctions that often overshadow interstate distinctions. If there is true concern
about disparities in cost of living that Congress ultimately decides must be taken into
account, then regional adjustments could be made to the federal exemptions, which
would provide more parity than ceding responsibility for exemption policy to the
states.

The exemption levels have been criticized by some as being too high and by
others as being too low. The previous text attempts to delineate the Commission's
reasoning for reaching the recommended numbers and addresses some of the counter
arguments.

Involuntary Filings. If uniform bankruptcy exemptions were more restrictive
than state law exemptions, creditors might develop a greater interest in bringing more
involuntary consumer bankruptcy cases. To prevent a creditor from filing an
involuntary petition simply to deny the debtor the protection of state exemption laws,
it might be necessary to make a slight adjustment to the standard for involuntary
petitions against consumer debtors. For example, an involuntary petition might
require a showing that the filing was not made solely for the purpose of entitling the
creditor to a less generous federal exemption. Only a handful of involuntary petitions
are filed against consumers under the current system, which means that the predicted
impact of this change would be minimal. (290)

Prebankruptcy Planning. Some remain concerned that a small fraction of
borrowers will continue to engage in prebankruptcy planning in attempts to shield
assets from their creditors while they discharge their debts. This Proposal vitiates
most of the need for the conversion of assets from one form to another because the
Proposal does not exempt narrow categories of personal property with no value
limits. It would remain possible to use assets that would exceed the exemption limits
to buy a home or move to a state with a higher homestead exemption, but the cap on
the homestead makes this far less likely or attractive. Because the safeguards against
excessive exemptions are accomplished through caps, there is no need to put further
restrictions on pre-bankruptcy planning, thus a statutory provision expressly
condoning prebankruptcy planning could eliminate unnecessary litigation and clarify
the law for debtors who are unsure about how much they can rearrange their financial
affairs. Of course, any prebankruptcy planning that runs afoul of other laws, such as
fraudulent conveyance provisions, would remain voidable in bankruptcy.

Note on nonbankruptcy debt collection. The bankruptcy exemptions also
affect the ability of the United States government to collect debts outside of
bankruptcy. The Federal Debt Collection Procedures Act relies on section 522(d) of
the Bankruptcy Code to determine what property is exempt from the reach of federal
debt collection actions. (291) For this reason, the Department of Justice has raised the question of whether the recommended exemptions should be applicable to
nonbankruptcy federal collection actions. (292) The proposed exemptions are lower than the current federal exemptions, but could be used to protect different property than
the present provisions.

Notes:

205 The historical antecedents of this approach are well established. According to one commentator, Roman law provided property exemptions to maintain an adequate tax flow: "The
public interest was thought to be serviced by those early exemptions because destitute persons were
unlikely to pay taxes or produce wealth that could be taxed." William J. Woodward, Jr., Exemptions,
Opting Out, and Bankruptcy Reform, 43 OHIO ST. L. J. 335, 337 (1982). Vern Countryman,
Bankruptcy and the Individual Debtor -- And A Modest Proposal to Return to the Seventeenth
Century, 32 CATH. U.L.REV. 309 (1983) (tracing history of exemption laws from Roman law
onward). See also Joseph McKnight, Protection of the Family Home from Seizure By Creditors: The
Sources and Evolution of a Legal Principle, 86 S.W. HIST. L. Q. 364 (1983) (Tracing history of Texas
exemptions). The homestead exemption signified family preservation. The Nebraska Homestead,
3 NEB. BULL. NO. 2 112 (1924).
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206 Early exemptions for personal property protected plows and cattle. In a society of farmers, craftspeople, artisans, and other entrepreneurs, exempting farm machinery and hand tools
protected debtors' future earning capacity. As more people became wage earners, exemption laws
dealt less with equipment and more with future wages.
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209 See Paul Goodman, The Emergence of Homestead Exemption in the United States: Accommodation and Resistance to the Market Revolution, 1840-1880, 80 J. AM. HIST. 470 (Sept.
1993) (recounting history of state homestead exemptions).
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212 186 U.S. 181 (1902). This case was brought by a creditor challenging the constitutionality
of the system, noting its apparent lack of uniformity despite the constitutional mandate to establish
"uniform laws of bankruptcy."
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213 The court's reasoning partly was derived from two decisions upholding the
constitutionality of the 1867 Act. In re Beckerford, 3 F. Cas. 26 (C.C.D. Mo. 1870) (state exemptions
variety did not compromise uniformity requirement, for creditors in any state only were entitled to
receive distribution from available portion of debtors' assets);In re Deckert, 7 F. Cas. 334 (C.C.E.D.
Va. 1874) (rejecting attack to law on basis of geographical diversity). Hanover, in turn, has been
used for subsequent challenges to the 1978 Code.
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214 REPORT OF THE COMMISSION ON THE BANKRUPTCY LAWS OF THE UNITED STATES, H.R.
DOC. 93-137, part I, 170 (1973).
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217 Several matters were clarified in the Bankruptcy Amendments and Federal Judges Act of 1984. For example, it resolved that debtors filing jointly could not "stack" federal and state
exemptions by having one filer pick the state exemptions while the other picked the federal
exemptions. In addition, Congress reduced the size of the "spillover" exemption. The 1994
Amendments doubled the amounts of the federal exemptions, essentially raising the exemption
"floor" in the non-opt-out states. Bankruptcy Reform Act of 1994, P.L. No. 103-394, 108 Stat. 4107,
4111 § 108.
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223 See Thomas H. Jackson, The Fresh-Start Policy in Bankruptcy Law, 98 HARV. L. REV. 1393 (1985). "[I]n order to justify nonwaivability, it must be shown that individuals systematically
misjudge (or ignore) their own interests and that this bias leads them to consume too much and save
too little. I will also argue that societal intervention in the decisions of individuals to consume credit
may be justified by the negative effects that those decisions may have on third parties." Id. at 1405.
Some states permit their citizens to waive exemptions. See, e.g., Ga. Code Ann. § 44-13-41 (1997).
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221 Lawrence Ponoroff, Exemption Limitations: A Tale of Two Solutions, 71 AM. BANKR. L.J. 221 (1997); Hon William Houston Brown, Political and Ethical Considerations of Exemption
Limitations: The "Opt-Out" as Child of the First and Parent of the Second, 71 AM. BANKR. L.J. 149
(1997).
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222 For information on states that have opted out, refer to the annex to this Chapter.
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226 See KAREN GROSS, FAILURE AND FORGIVENESS; REBALANCING THE BANKRUPTCY SYSTEM 46-49 (1997) (providing examples of how debtors and creditors experience different outcomes under
bankruptcy law depending on which state system is operative).
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230 See, e.g., Lynn M. LoPucki, The Death of Liability, 106 Yale L. J. 1, 32 (1996) ("Congress was concerned with equity between those already judgment proof and those who sought
to become so on the eve of bankruptcy"). The legislative history of the Bankruptcy Reform Act of
1978 suggests that prebankruptcy asset conversion was not intended to be prohibited, for it was not
fraudulent for a debtor to make full use of exemptions to which he is entitled under the law. H.R.
REP NO. 95-595 (1977). However, this type of prebankruptcy planning has not been met with uniform
acceptance and has been the subject of much litigation and discussion. Lawrence Ponoroff & F.
Stephen Knippenberg, Debtors Who Convert Their Assets on the Eve of Bankruptcy: Villains or
Victims of the Fresh Start?, 70 N.Y.U. L. REV. 235 (1995). It also is problematic for lawyers who
do not want to advise their clients to commit fraud, but also have the responsibility to protect their
clients to the extent the law provides.
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232 Memorandum from Jonathan Gruber, Deputy Assistant Secretary (Economic Policy),
Department of the Treasury to Fran Allegra, Deputy Associate Attorney General, Department of
Justice, Subject: "Treasury Comments on Bankruptcy Commission Position on Asset Exemption
Levels," (June 16, 1997) (arbitrary distinctions between exemptions in different categories of goods
leads to distortion in asset allocation; inequities arising from favoring savings in one form over
another).
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233 See, e.g., Peter S. Canellos, Sheltered from Bankruptcy; Fla. Home Exemption Gives Debtors a Haven, BOSTON GLOBE, Apr. 22, 1997, at A1; Sandra Ward, Bailing Out: Bankruptcy,
Once a Disgrace, Has Become As American as the Fourth of July, BARRON'S, June 17, 1996, at 17;
David Barstow, In Florida, Simpson May Find a Financial Haven, ST. PETERSBURG TIMES, Oct. 19,
1995, at 1A ("Were Simpson to move to Florida and file for bankruptcy, creditors couldn't touch his
home, no matter how lavish, bankruptcy lawyers say. Conceivably, Simpson could sell Brentwood,
sell his New York apartment, sell his Bentley and sink his money into a spread of up to 160 acres of
prime Florida real estate, declare bankruptcy a week later, and all of it would be untouchable").
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241 At least one debtors' attorney has noted that many senior citizens who have worked hard to pay down their mortgages end up losing their homes under current exemption policy. See, e.g.,
Letter from Steven J. Abelson, attorney in Freehold N.J. (May 9, 1997).
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242 When the Commission commenced its discussions of a specific exemption Proposals, the Commission was working with a $40,000 floor, but expressed interest in exploring options to find
the most justifiable level in light of the aforementioned considerations. Three possible
alternatives-$40,000, $30,000, and $25,000-initially were explored and the Commission first adopted
a $30,000 floor. Upon later reconsideration, the Commission voted to recommend a $20,000 floor.
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255 A debtor who chooses to use state law exemptions may attempt to exempt his interest in a tenancy by the entirety to the extent that such interest is exempt from process under applicable state
law. 11 U.S.C. § 522(b)(2)(B) (1994). SeeIn re Edmonston, 107 F.3d 74, 75 (1st Cir. 1997)
(applying Massachusetts law).
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257 Section 363(h) permits the trustee to sell property held in this form if partition is impracticable, sale of the debtor's undivided interest would yield significantly less, and the benefit
to the estate outweighs the detriment to the nondebtor spouse, 11 U.S.C. 363(h) (1994). Even when
applying the same state laws, courts disagree on whether there must be an actual judgment rendered,
or whether the existence of joint creditors suffices Cf. In re Himmelstein, 203 B.R. 1009 (Bankr.
M.D. Fla. 1996) (joint creditor must hold joint in personam judgment to defeat exemption and permit
sale) withIn re Planas, 199 B.R. 211, 217 (Bankr. S.D. Fla. 1996) (entitlement to levy is all that is
required).
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263 "Only an individual can accurately measure the difference between the value he places on an asset and the market price." Thomas H. Jackson, The Fresh-Start Policy in Bankruptcy Law,
98 HARV. L. REV. 1393, 1439 (1985). "Society could formulate a relatively short list of assets
considered vital to the typical individual's well being . . . There is another option that might better
reflect the individual's subjective belief about his needs for various assets in the future. Society could
allow the debtor to exempt a specific amount (say, $25,000 worth) of existing assets (over and above
human capital and, perhaps, wage substitutes) and leave the individual to decide which of his existing
assets to exempt." Id. at 1435.
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266 Adding together the present section 522(d) exemptions yields a total of $21,700. This includes the exemptions for a motor vehicle ($2,400), household items ($8,000, none of which to
exceed $400), jewelry ($1,000), wildcard ($800), professional tools ($1,500), and accrued dividend
or interest in unmatured life insurance contract ($8,000). The homestead equalization exemption
would be doubled over its current maximum allowable amount but would be available in fewer cases,
e.g., when there was no home equity to be exempted at all.
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272 General Accounting Office, Bankruptcy Administration: Case Receipts Paid to Creditors and Professionals, GAO/GGD-94-173 (July 28, 1994). They generated nearly 80% of the revenue,
but the business cases comprised only about a third of all the asset Chapter 7 cases.
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273 General Accounting Office, Bankruptcy Administration: Case Receipts Paid to Creditors and Professionals GAO/GGD-94-173 (July 28, 1994). In another sample of preliminary data from the
Central District of California, 243 cases under $50,000 were liquidated, yielding a total distribution
for creditors of about $3 million. 100 cases with $50,000 or above yielded $29 million for the
unsecured creditors. Again, in both large and small cases, consumer cases make up only a fraction
of the distribution.
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274 Ownership of non-home assets, such as stocks, mutual funds, rental property or a business, vehicles, other real estate, IRAs and KEOGH plans, etc. each comprised 7% or less of total
assets. Bureau of the Census, Statistical Brief, Household Wealth and Asset Ownership: 1991.
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275 This rationale has motivated some state legislatures, such as that of Massachusetts, to grant a larger homestead exemption for citizens past retirement age. Mass. Gen. Laws. Ann. ch. 188
§1A (1997).
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276 Family Finances in the U.S.: Recent Evidence from the Survey of Consumer Finances, 83 Federal Reserve Bulletin at 5, 10 (January/February 1997).
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278 For example, in Ohio, IRA and KEOGH plans are exempt when necessary for support. Nebraska has a similar limitation on profit sharing plans. Missouri imposes the same requirement,
assuming the plan met applicable tax restrictions, as do Iowa and Georgia.
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279 For example, some courts go through the following analysis to determine whether a retirement fund is reasonably necessary for the Debtor's support: (1) Debtor's present and anticipated
living expenses; (2) Debtor's present and anticipated income from all sources; (3) Age of the debtor
and dependents; (4) Health of the debtor and dependents; (5) Debtor's ability to work and earn a
living; (6) Debtor's job skills, training and education; (7) Debtor's other assets, including exempt
assets; (8) Liquidity of other assets; (9) Debtor's ability to save for retirement; (10) Special needs
of the debtor and dependents; (11) Debtor's financial obligations, e.g., alimony or support payments.
In re Flygstad 56 B.R. 884, 889-90 (Bankr. N.D. Iowa 1997).
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281 For example, Alaska law provides that tax qualified plans are exempt, excluding contributions made 120 days prior to bankruptcy. Likewise, otherwise exempt contributions made
within a year of the bankruptcy filing are non-exempt in Louisiana and Mississippi. In Montana, tax
qualified stock plans are exempt except for contributions made within 1 year of bankruptcy in excess
of 15% of debtor's income for that year. Id.Return to text

282 E.g., In re Barshak, 96-1423, 1997 WL 50616 (3d Cir. Feb. 10, 1997) (Pennsylvania restricted to $15,000 per year in certain employer sponsored plan contributions). Other states with
monetary limitations, either in total or on yearly contributions, include Vermont, North Dakota, South
Dakota, and Idaho. 14 COLLIER ON BANKRUPTCY (Lawrence P. King et al eds. 15th rev. ed. 1996).
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283 Patterson v. Shumate, 112 S. Ct. 2242 (1992). The Supreme Court found that pension plan assets in a qualified pension plan with an anti-alienation provision were not included in the
debtor's bankruptcy estate pursuant to the plain language of the Bankruptcy Code and ERISA; the
plan's anti-alienation provision was a "restriction on transfer enforceable under applicable
nonbankruptcy law" under section 541(c)(2). Approximately 37 states have exemptions applicable
to ERISA-regulated pensions. See COLLIER ON BANKRUPTCY at CasHi-37 (Lawrence P. King et al eds.
15th rev. ed. 1996).
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284 The $30,000 maximum contribution would be available only to a debtor earning more than $120,000 in the year of the bankruptcy filing. Even if a debtor made $120,000 a year, the
exemption would be $30,000 only if the debtor's employer made the contribution to the maximum
amount. If the plan is established as a spendthrift trust, the contribution is fully exempt under current
law.
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285 11 U.S.C. § 541(a)(6) (1994). "This reservation of future earnings exclusively and inalienably to the debtor is the 'fresh start' that has been a driving tradition of American bankruptcy
law. The system provides a fresh start at least partly because of the difficulty of denying it. Debtors
who could neither pay nor discharge their debts might adopt a judgment-proof lifestyle, adopt a new
identity, or join the underground economy. Both debtor and creditor might spend considerable efforts
on a struggle that yielded less for the creditor than it cost the system in the aggregate." Lynn M.
LoPucki, The Death of Liability, 106 Yale L. J. 1, 32 (1996). Future wages are, however, part of the
estate in Chapters 12 and 13. See 11 U.S.C. §§ 1207(a)(2), 1306(a)(2) (1994).
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